Improving the availability of capital to renewable energy projects represents a critical component to lowering the overall cost and scaling the adoption of renewable energy technologies. Public capital — investment raised in the financial markets through securitized instruments and pooled investment vehicles — is a potential means of achieving these goals. Public capital mechanisms offer renewable energy projects — which are regarded as mid-high risk investments in the marketplace — numerous attributes that could be attractive to investors, including:

Diversity of investment through pooled assets

Liquidity (marketability) of the security once procured

Transparency of the market price through public trading.

A recent NREL report, Financing U.S. Renewable Energy Projects Through Public Capital Vehicles: Qualitative and Quantitative Benefits, highlights the benefits and challenges of renewable energy access to public capital through various investment mechanisms, such as asset-backed securities (ABS) (see Figure 1) and master limited partnerships (MLP). The report also quantifies the potential effect on the levelized cost of energy (LCOE) for wind and solar technologies with the application of public capital finance to the project or portfolio capital stack.

Figure 1. Hypothetical solar ABSs, one of the public capital vehicles potentially available to renewable energy

The report identifies two basic methods by which public capital could be applied to renewable energy projects:

As part of the "initial capital stack," representing an original source of capital funding. There are two ways to use this method and still take advantage of the tax benefits.

Replace project debt (from commercial lenders) with public capital that has a lower capital cost. Project debt can be fairly inexpensive but is constrained by a smaller investment pool. Replacing public capital for project debt can confer the primary benefit of expanding the quantity of capital rather than meaningfully reducing its required yield.

Replace equity (either sponsor or tax) after the tax benefits expire or diminish (post-2013 for wind and post-2016 for solar).

As "take-out financing," which would procure the remaining interest of a tax equity investor once the tax benefits are fully utilized (and the project is allowed to be sold without recapture penalty by the IRS).

According to NREL's analysis, increasing the use of public capital can lower a project's LCOE associated with solar and wind deployment by roughly 8–16 percent (and perhaps more), depending on the source of financing it replaces (e.g., debt or tax equity) and other assumptions.

Figure 2 represents the range of LCOEs calculated for residential- and utility-scale solar facilities under traditional, ABS, and MLP financing structures in 2017 when the investment tax credit reverts from 30 percent to its long-term rate of 10 percent.

Figure 3. Comparison of wind LCOE between traditional financing and public capital financing

Reductions in the cost of capital and thus the cost of energy for renewable energy would be a competitive boost for these technologies, opening more avenues for deployment without increasing policy support. The greatest benefits of successful access to capital markets might not be in reduced LCOE, however, but in the ability to expand the scale and increase the speed of solar deployment. These benefits were not estimated in the report.

1 Comments

Interesting study, and fairly complex. We did a piece on small-scale renewables financing in Canada a while ago, which can be found here: http://www.envint.ca/files/Final%20Report%20March%2020%202009.pdf

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Michael Mendelsohn is a Senior Analyst with the National Renewable Energy Laboratory’s project finance team and expert in PV and CSP financing. His expertise spans 20 years and encompasses various aspects of renewable energy technologies,...